Current Affairs Magazine

INDIA IS ON THE RIGHT TRACK

Loveena Tandon speaks to Richard Heald, CEO of the UK India Business Council (UKIBC), which provides research, advocacy, contacts and policy advice to UK companies interested in doing business in India, about how India’s 2016 budget fared with the council and its member businesses in Britain

Q1. What do you think about the recent Indian budget?
I was quite impressed by the budget. On one side it was a relatively political budget on the basis that it had lots of measures that related to the rural economy and measures to alleviate the impact of two failed monsoons. In many ways it was like back in the days of Chidambaram. There were a lot of similarities.

Key things that we found very positive was the very firm statement around fiscal discipline; the Finance Minister gained 2015-16 targets and also maintained the 2016-17 targets even in the light of the fact that he also got to enact the salary increases in the public sector. This sent a very positive message and we saw that in the stock market, in equities and in bonds. I think we have also seen the reaction from the corporate world. Now we look at the RBI because it gives them scope to reduce the interest rate in the course of a year. Something between 25 to 50 base points is the expectation. From that point it sets the scene very well. I am also encouraged by structural changes around taxation, making it user friendly as far as the man on the road is concerned. I also think that the extension of the schemes similar to the ones he introduced around irrigation is very positive. I listened to Mr Jayant Sinha and he indicated this was in the direction of a general desire to create an Indian sovereign wealth fund. I was encouraged by the statement about disinvestment. That, hopefully, augurs well for the new attitude towards making state assets more positive.

These were the positives. On the other hand there were some negatives. Let’s mention education, healthcare and defence. We wanted to see movement on corporation tax. In 2016 Mr Jaitley gave an estimate on making corporation tax, currently 30 percent, down to 25%. In effect, nothing has been said about this in practice. It has raised the burden of taxes on small and medium size business to somewhere in the region of 34%. Clearly, at 34% the tax burden, which is significantly in excess of international norms, is something that needs to be looked at in order to encourage investment and manufacturing in India. He has looked at reducing tax on small businesses but you have to look at the science of businesses in order to get the effect. This is a concern as this number is in excess of international normal digits. If one has to look at manufacturing in India, this also has to be looked at. The action we would have liked is in the area of withholding tax. The 5% tax levied on bonds raised internationally means that the international markets are not attractive for raising overseas funds. Giving Indian companies access to international markets and investors is something that will kick start economic development. The other thing we found curious was the offer to waive penalties and interest on the withholding tax case. I find it curious because I don’t think it will have any effect at all.Q2. Can you assess the budget from the India-UK perspective?
The general direction of the budget is one we are very positive about. If we mark it out of 10 then it would score 7.

As far as UK-India relations is concerned the budget was broadly welcomed by UK companies who are based and operating in India. I think that the general positivity around economic performance and the 7.6% growth being projected will encourage UK businesses to export to India and will encourage the setting up of manufacturing within India as well.Q3. Can you please elaborate on the corporation tax concern?
Corporation tax goes to the heart of Make in India and, in order for Make in India to succeed, the overall tax regime in India has to be in line with International levels. That is both in application and legislation as well as the levels of actual taxation. So if you look at corporation tax itself, the UK has the lowest level at 20-25%. It means that for a company manufacturing here then the cost of doing that is attractive relative to a higher tax jurisdiction. If one was to encourage companies to set up in India then a more favourable corporation tax regime will be one of the mechanisms one would like to see for that to happen. Politically it is important to encourage small businesses to grow as much as possible to become larger businesses.

India is on the right track, the ease of doing business is improving but if someone has a pan-India business they could still need 250,000 licences every year. The scope to reform and improve is still immense!

If I was a company wanting to participate in the South East Asian bloc then that would be one of the comparing factors in making India one of my manufacturing bases. From the Make in India environment, India is not a competitive environment.

We are aware of a UK company that manufactures in India and exports to Dubai. This is a classic case of Make in India. The tax authorities treat that domestic manufacturing as off-shore rather than on-shore exporting. As a result this UK entity is considering making its back office in India but its manufacturing factory exporting to the gulf. In this case India loses out on jobs and tax. So the application of tax is slightly undermining Make in India.

Q4: This is defeating the whole purpose of Make in India, one wonders why?
Indeed one wonders why. In fact instead of making it better as promised in the last budget, what has happened is that in this budget, because of other taxes etc the tax burden of larger and medium sized companies has actually increased so it’s not that they have done nothing but they have made it worse.Q5: Are investors encouraged to invest in India after the budget or are we still talking of a ‘hope but wait and watch’ policy?
There are a umber of factors around that. There is a desire that the NDA government moves faster and puts more stimulus into the economy. But everyone has limited resources and they want to put it where it is most profitable. The growth of 7.6 % is positive, inflation is under control, interest rates are expected to come down. These are all positives. The key is to look at FDI [foreign direct investment] numbers in the first half of 2015. It was larger than that of the United States, somewhere in the region of 33 billion dollars, larger than the comparable period for China and indicates that FDI inflow is holding well. That is a positive momentum. Would people want more and faster? Yes, but the trend is good.Q6: Ease of doing business with India has been a big concern always. Has anything improved on that front with this budget?
Ease of doing business is moving forward in the right way. The digitisation programme and licences are positive. The result of that is the upgrading of India’s ranking in the World Bank level. But at the same time we are again looking at the parliamentary budget session in which we would not have passed all important land legislations; labour reforms and particularly the GST all of which would have had a material positive impact on both the perception of the ease of doing business and fact of the ease of doing business. Does that have a positive impact on the economy? Yes, it does appear so in terms of bureaucracy and getting permissions and permits. There is continuous positive momentum and I think competitive federalism plays an important part in it but on the other side we still have this legislative gridlock in some of the key reforms that will impact the economic developments. One business told me that in order to run a pan-India business they need to get 250 thousand licence approvals every year. I can’t believe they are unique in that situation. Nonetheless, this gives a quantum that suggests that, if you are running a business in multiple states, the number of licenses you require is extraordinarily high.Q7. As compared to before how easy in percentage terms is it to set up business in India?
50% of our members said that definitely they had seen improvements and ease of doing business in India and, of the remaining 50%, half of those said they saw reforms being put in that will impact on the ease of doing business. Even things like the willingness of states to compete against each other for inbound investment. This is a new phenomenon. We are seeing the streamlining of licences and the making available of land in their land bank. All this is starting to come through. States are very willing to get jobs and investments into their states rather than see them going somewhere else.Q8. Your wish list for next year’s budget?
My wish list would be:

A further simplification of the tax regime in terms of application and legislation

Increased investment in the education sector, especially in up-scaling and the professional learning area as there could be a work-force bottleneck unless there is significant investment going into that